The Foundation of a Successful SMSF – Informed Decision-making

The number of self-managed superannuation funds (SMSF) in Australia continues to grow as people set up their own funds and take control over how their money is invested for retirement. They are willingly taking on the role of a trustee with the awareness that this control comes with the responsibility for making all the investment decisions.

This is a role that should not be undertaken lightly, and trustees should do their own research before they take the first steps to set up the fund. Many people who consider this step assume that any professional organisation that advertises SMSF services is also able to give financial planning advice. However, this is not the case.

The role of companies such as SMSF Assure is to arrange the establishment of the fund, making sure that every requirement of the ATO (Australian Taxation Office) has been met in the process. They also manage the ongoing administration on behalf of the trustees, which includes meeting reporting deadlines and all other relevant compliance issues, but they do not provide financial product advice.

To provide such advice to an SMSF trustee, an organisation must hold an Australian Financial Services Licence. There are specific, ongoing obligations attached to holding this licence, including compliance with financial services laws. This is just one of many others.

This is an important difference for trustees to understand, especially as they are still responsible for the decisions made on behalf of the fund. This applies even if they have sought and followed the investment advice of one of these licensed professionals.

The fund trustees are responsible for establishing an investment plan for their SMSF when they first set up the fund. This is the point where they make the first of many decisions that will determine the financial circumstances of the fund members when they retire.

Having a well thought out investment plan helps them make those decisions, not only at the outset, but also throughout the life of the SMSF. The plan must be reviewed at least annually to keep it current and responsive to market variations and changes in the life circumstances of its members.

Some trustees are very knowledgeable about finance and investment, and have the confidence to make these decisions without seeking outside advice. For those who are not, the first decision they usually make is to engage a reputable company such as SMSF Assure to help them manage the administration and compliance. Their second decision is to choose a licensed financial services professional to work with them on an investment strategy.

Like any good decision-making process, they then need to:

  • Gather information, review, analyse and check for accuracy;
  • Discard what is not relevant;
  • Use what remains to make a short list of companies that will suit their objectives;
  • Do further investigation including making appointments to meet key people in the chosen companies;
  • Do a final review incorporating any new information; and
  • Select the company they believe will give them the best result in building the assets in their fund.

There is no magic formula to creating a successful SMSF. It is a serious undertaking requiring cool heads, financial knowledge and the clear, long-term goal of a financially satisfying retirement income.

Thinking About Starting an Smsf? The Time to Act Is Now!

Australia’s superannuation industry is the fourth-largest private retirement/pension fund in the world and still growing. Our combined superannuation assets have long since passed the $2 trillion mark and of these, 22.7% of superannuation assets are currently held by self-managed superannuation funds (SMSFs).

Most members of retail, industry or employer superannuation funds are not particularly interested in how their fund is managed. They are content to trust their investments to fund managers whom they perceive to be more knowledgeable than they are, and therefore more likely to make better investment decisions.

Other people who are more financially aware than most of the superannuate population have taken steps to start their own SMSF and there are now approximately 600,000 of these funds in Australia. This growth has been escalated by changes to borrowing rules in 2007, which allowed SMSFs to borrow funds to purchase investments, including residential property.

The opportunity still exists for people with reasonable financial knowledge to set up their own SMSF and start planning for retirement. There is also a thriving support network of specialist SMSF administrators such as SMSF Assure to help with administrative and compliance requirements. With that in mind, here are three reasons to start working on setting up your own SMSF right now.

The first is the amount of control the SMSF trustees have over their own destiny. They decide on the types of investments in their portfolio, and the level of risk they are prepared to take to reach their goals. They are also in charge of distributing pensions and death benefits, so there is a high level of responsibility involved. This close involvement in the activities of the fund increases the level of engagement in its performance.

The second reason is the amount of flexibility that overseeing the fund affords the trustees. They can invest in a wide range of asset classes within the confines of the superannuation regulations and the terms of their SMSF trust deed. Most SMSF trustees will still invest in traditional assets but they can also invest in other assets such as works of art, collectibles and residential real estate. This flexibility also means they can change their investment portfolio to meet market and regulatory changes.

The third reason is the changes to borrowing rules mentioned earlier. SMSF trustees can acquire assets like residential or commercial property, which, prior to 2007, were out of the reach of superannuation funds. The concessional tax rates on the earnings from these investments are attractive and this gives the trustees and members the opportunity to build their super balances faster than would previously have been possible.

If those are not enough reasons for you to take charge of your retirement income, there is one more reason that is an overriding factor. The sooner you start, the more opportunity you have to build your investment portfolio. The longer your superannuation fund is active in the market, the more chance there is to grow the returns, allowing you to work towards the retirement lifestyle you desire.

Do the New Superannuation Laws Affect Your SMSF?

While superannuation was originally destined to provide an income in retirement, for several years, this objective was not taken seriously and it became for many people a vehicle for legal tax minimisation and estate planning purposes. The government has sought to address this by declaring in legislation that the objective of superannuation is to provide income in retirement to substitute or supplement the Age Pension.

They have introduced a range of legislative changes that will better target tax concessions to those who need incentives to save. They are limiting taxpayer support for tax-free retirement phase accounts, increasing the tax rate on some concessional contributions and making changes to the cap amounts on concessional and non-concessional contributions.

If you are a trustee of an SMSF (self managed superannuation fund), these important changes to the superannuation laws come into effect on 1 July 2017 and may affect you. That date is now alarmingly close, so if you have not yet reviewed these changes to see how they will affect your fund, now is the time to act. There are three things in particular that are important to know about, and need to be acted on before 30 June.

Retirement Pensions and the Transfer Balance Cap

You must determine if you have exceeded the $1.6 million transfer balance cap that is being introduced on 1 July. This change will put a limit on taxpayer support for tax-free retirement phase accounts, and will affect both current retirees and those yet to reach that stage of their lives.

It is important to note that this limit applies to the total value of all your pensions, and not just per superannuation fund. If you have other pensions, you will need to include the Special Value of those pensions when checking if you have exceeded the transfer balance cap. Remember that your total superannuation balance as at 30 June 2017 is used to assess your eligibility to make non-concessional contributions from 1 July so you must check this immediately.

Timing of Contributions

Make sure any contributions you make to your SMSF or any other super fund is received on or before 30 June 2017. This allows you still to use the higher limits available under the current legislation. Miss that by one day and you could exceed the new limits.

Also check to see if the bring forward provision has been triggered as this may affect the amount you can contribute both this financial year and from 1 July 2017. This could be advantageous now, as contribution limits will be reduced from 1 July for both concessional and non-concessional contributions. From that date, anyone with more than $1.6 million in superannuation will be unable to make additional non-concessional contributions.

Employer and Salary Sacrificed Contributions

If you are receiving employer contributions via the Superannuation Guarantee system, check that those for the June 2016 quarter were received by your SMSF in July 2016. These should be included in your concessional contribution cap for the 2016/2017 financial year.

Watch that you do not exceed the cap for the current year by neglecting to include salary sacrificed contributions. These are concessional and must be part of your calculations.

An Easier Alternative

These are just three of the changes that the new laws have created, placing a lot of pressure on SMSF trustees to understand the changes and make sure they have taken everything into account for the benefit of their members. If you have any doubts and you are still managing your SMSF without assistance, you still have time to contact a professional organisation such as SMSF Assure if you act now.

What Is the Most Important Factor in Deciding to Open an SMSF?

Has the investment performance of your retail or industry superannuation fund been a little lacklustre of late? Do you look at the investment mix and wish it were not quite so conservative? Do you think you could do better and that it may be time to start your own SMSF (self-managed superannuation fund)? While you are not alone in thinking that, you may be surprised to know that these are not the best reasons for setting up your own fund.

There are some other factors that may impact on your decision. For example, have you any plans to live overseas permanently in the future? To qualify for the 15% tax concession rate and remain compliant, the SMSF trustee must be an Australian resident, so this arrangement would not suit a non-resident or someone planning to relocate overseas permanently.

Also, the ATO (Australian Taxation Office) has some eligibility criteria around the person or persons who can operate as trustee of an SMSF. The most common exclusions are people who have been convicted of an offence involving dishonesty, have been subject to a civil penalty order under the super laws, are insolvent under administration or been disqualified by a court or a regulator.

If none of these factors applies to you, and you still think you have what it takes to manage your own fund, the best reason for proceeding has nothing to do with timing. Instead, it is to take advantage of investment choices and strategies that ordinary industry or retail funds cannot currently provide.

For example, you may have had your eye on an investment property so having your own SMSF will allow you to borrow in order to purchase it. If you own or operate a business, you can also purchase business real property and lease those premises for the purpose of conducting business.

The other important factor you must consider carefully is the question of cost. There is a great deal of administration, management and ongoing reporting to keep your fund compliant. For it to be worthwhile, you must be satisfied that the administration and investment management fees of your SMSF are less than would be incurred in an industry or retail super fund.

This is particularly important if you are thinking about using a professional organisation such as SMSF Assure to assist you. They handle every aspect of the paperwork involved in the set-up process, and continue the ongoing administration of your fund, ensuring that all reporting deadlines are met and compliance is maintained.

With the assistance of professionals such as these, and an investment strategy developed with a licensed financial advisor, this could be the perfect time for you to open your SMSF.

SMSF Terminology Can Be Confusing

The self-managed superannuation fund industry in Australia continues to expand as more people seek to take control of the process of building their retirement income. Before anyone takes the first steps to set up their own fund, however, they should realise that there is a lot to know and understand about not only the process of running the fund, but also of some of the terminology and what it means.

Most people understand the meaning of the word “asset” but in the world of the SMSF (self-managed superannuation fund) this is preceded by the word “pooled” and conversely, the word “segregated”. It is important that fund managers become familiar with these terms and understand the difference between pooled assets and segregated assets.

Pooled Assets

Let’s start first with pooled assets, which, as the name would suggest, describes the treatment of both the income and the assets within the fund. When the income and assets are pooled together, they are proportionally allocated between member pension accounts and accumulation accounts. The pension accounts receive favourable treatment under our taxation rules. The portion of the pooled assets allocated to the pension accounts can be claimed as exempt from the 15% fund income tax.

To claim this exemption however, the SMSF must obtain a Tax Certificate from an actuary stating the actual percentage of the fund’s assessable income being claimed. This percentage is then applied to the assessable income with a couple of exclusions. However, if one of the fund members retires and commences a pension part way through the year, the percentage that could be applied becomes more difficult to calculate. If during that time, for example, a fund asset with a large unrealised gain is sold, a lesser percentage of the capital gain is exempt from the 15% fund income tax than if the assets had been segregated.

Segregated Assets

When the fund segregates their holdings, they have assets that have been specifically allocated, or segregated, to fund pensions. By using this method, a certificate from an actuary is not required, but they do need to track the income from those assets. This is important when it comes time to claim that income as exempt from the 15% fund income tax. Also, the value of the assets that have been segregated to fund pensions cannot exceed the total value of those pensions.

From an administration perspective, the pooled asset method is easier for a fund trustee to manage, but it may not be in the best interests of the fund members, given the changes proposed by the federal government. The segregated method requires much more administration but it offers the opportunity to take better advantage of the existing tax exemptions.

Specialist SMSF Administrators Available to Assist

Accountants and specialist SMSF administrators such as SMSF Assure should be meeting with their SMSF trustees to discuss these two methods so that the trustees understand the differences and can make fully informed decisions about which method best suits their fund. With other changes likely to take place, it is important for trustees who have specialist SMSF administrators to keep in regular contact and discuss any issues with them before making major decisions.